What to do when you need business crisis cash
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Cash is the life blood of your business. Without enough of it, circulating quickly enough through your business’s body, your business is dead.
Because what happens when a business fails, to be simplistic, is that it runs out of cash; insolvency is essentially a matter of being unable to pay your bills when they are due.
And while business failure is often associated with decline and losses, in fact a business can run out of cash for a variety of other reasons such as:
- Excess illiquid assets – where the business has tied up too much of its cash in plant and machinery, property, slow moving stock, or development of a new product and has insufficient left to fund its trading.
- Too much growth – where the business’s transactions are expanding faster than the cash resources needed to fund them (‘overtrading’).
And so, whatever the underlying reason for a cash crisis, the need to deal with it urgently is the same.
And that is where this Galen Partners’ Business Guide to potential emergency sources of business funding can help you.
Dealing With a Cash Crisis
To deal successfully with a cash crisis it is important to:
- establish how deep the problem is (since if it is too deep you may actually need to deal with it via a formal insolvency process)
- understand what has caused it (so you can fix the problem)
- actually take the steps needed to fix the problem, and
- establish how much additional funding is required, for how long, to enable the problem to be fixed.
If you can’t fix the problem, or raise enough cash to give you time to fix the problem, then the issue is not one of raising cash to deal with the crisis; it is a more fundamental one of dealing with a potential business failure.
It is important to accept that raising new business cash when a business is under the pressure of a cash crisis can however be:
- Hard – convincing lenders or investors to advance
- Time consuming – in preparing information and negotiating with funders, at a time when your finance function will be under severe pressure anyway
- Uncertain – as to whether funders will actually advance or whether an application will fail before completion
- Risky – as to raise funding you will have to expose the financial requirement and critical business information to a range of third parties, and
- Expensive – in both arrangement and advisory fees to set up; as well as in the levels of interest rates and charges a funder will impose due to the extra risk in financing a stressed situation
So before looking at the potential sources for raising new cash (or at the very least in parallel with new finance raising efforts), it is important to take all steps possible to minimise the requirement and therefore your reliance on success.
While cash management is not the subject of this briefing, key steps to look at here involve:
- Improving cash management
- Increasing the funds coming in, for example by improved debtor collection
- Reducing the amount you need to trade, for example by the use of lean cash flow
- Reducing the money going out, for example by negotiating creditor deals or a time to pay arrangement with the Crown
More information on many of these areas can be found on our websites, and in particular in the directors’ briefings available on www.turnaroundanswers.co.uk.
We also provide a range of services such as the examples below that can help you to manage each of these areas, so please contact us if you require any assistance.
0844 576 0402 / post@galenpartners.co.uk
Summary of Key Funding Sources
The following pages give short key facts briefings on a range of finance sources.
This is obviously not a comprehensive list of all types of business funding that are available. Instead it is just intended to highlight some key ones that may be applicable for use in a business finance emergency and covers:
- Personal loan for business purposes
- Pension scheme loan
- Pension scheme sale and leaseback
- Bridging
- Asset based lending
- Factoring / invoice discounting
- Block discounting
- Stock finance
- Trade finance
- Redundancy Payments Office loan
- Mezzanine finance
- Bond issues
- Business angel investment
- Institutional stressed equity investors
Finally, if you really are facing the question of ‘how do you pay the wages on Friday?’, we may be able to help as we are working with a lender to develop a service specifically designed to help with this problem; please contact us for details.
For advice or assistance in seeking any of these types of finance please contact us at:
0844 576 0402 / post@galenpartners.co.uk
1
| Type | Personal loan for business purposes |
| What is it? | A personal unsecured bank loan to you for use within your business |
| What can you raise? | Personal loans of up to £25,000 (a cut off limit under consumer credit legislation) are available from a range of high street lenders, some of whom are happy for the purpose of the loan to be for business use |
| How long does it take to put in place? | Typically up to 3 days |
| How long a facility does it provide? | A loan often over a term of up to ten years |
| Pro? | Quick to arrangeGenerally available to anyone with a reasonable credit rating (so homeowners with no adverse credit history should be able to access it without too much difficulty) |
| Con? | A personal loan to you, rather than to the business so risk is with youUnsecured personal loans rates are reasonably highTend to be inflexible, for example accelerated repayment is often not available (unless the loan is cleared in full) |
2
| Type | Pension fund loan |
| What is it? | A commercial loan to your business from your pension fund |
| What can you raise? | Depends on the financial position and type of your pension fund as well as the financial position of the businessRequires specialist IFA advice |
| How long does it take to put in place? | |
| How long a facility does it provide? | |
| Pro? | You become your own banker |
| Con? | Can be complex to arrangeHas to be a commercial arrangementPuts your personal assets’ value into the businessLikely to have tax implications |
3
| Type | Pension fund sale and leaseback |
| What is it? | Sale of business assets – typically the commercial property – by the business to your pension scheme, which then leases it back to the business for a commercial rent |
| What can you raise? | The open market value of the property, less any net borrowing repaidThe scheme has to operate like any other investor in undertaking a commercial deal, so a view will need to be taken on the strength of the covenant being acquired when assessing property value |
| How long does it take to put in place? | Largely dependent on the speed with which advice can be given and legals of a property sale completed. |
| How long a facility does it provide? | Pension scheme will need to provide a normal commercial lease which will typically be for 15 to 25 years |
| Pro? | You become your own bankerYour pension scheme as a solvent asset rich entity can often find it easier and cheaper to raise a mortgage with which to leverage a purchase than the business can |
| Con? | Can be complexHas costs to put in place such as valuations, legals, professional advice and stamp dutySale of the property may give rise to a capital gain and hence a tax charge which will need to be calculated and payment provided for as well as personal tax implicationsCan give rise to problems with plant and machinery funders |
4
| Type | Bridging |
| What is it? | Secured loan against property |
| What can you raise? | Up to 70% of property’s value on a ‘forced sale’ basis |
| How long does it take to put in place? | One to two weeks |
| How long a facility does it provide? | Generally 6 to 12 months |
| Pro? | Limited reliance on business’s ability to pay (affordability) as based on asset valueCan be quick |
| Con? | Based on forced sale value of the property so amount that can be raised may be smaller than you expectCan be expensiveYou need to ensure you have a way to exit the loan at the end of the termArea of market which has suffered from advance fee fraud so ensure you deal with a reputable lender |
5
| Type | Asset based funding |
| What is it? | Sale and leaseback of plant and machinery, motor vehicles etc |
| What can you raise? | Varies substantially but typically say 70% of the asset’s value on a ‘forced sale’ basis |
| How long does it take to put in place? | One to two weeks |
| How long a facility does it provide? | Generally 3 to 5 year lease |
| Pro? | Limited reliance on business’s ability to pay (affordability) as based on asset valueCan be quick |
| Con? | Only applicable to larger assetsBased on forced sale value of the property so amount that can be raised may be smaller than you expectCan be expensive |
6
| Type | Factoring / invoice discounting |
| What is it? | Secured loan against receivables |
| What can you raise? | In practice up to say 65% of your debtors under 90 days oldSingle invoice financing is also available from some sources allowing you to cherry pick specific balances to fund against, which can be useful for covering very temporary peak funding requirements |
| How long does it take to put in place? | 2 to 3 weeks |
| How long a facility does it provide? | Often 12 months with a 3 or 6 month notice period |
| Pro? | Limited reliance on business’s ability to pay (affordability) as based on debtor book valueCan be quick to put in place |
| Con? | Will usually need to pay off overdraft out of initial advanceHeadline advance rates do not translate into realitySome debtors not fundable or will have low advance levels / high reserves applied (contract style debts, high concentration debtors, businesses with mutual trading relationships)Beware minimum levels of charges built in
Usually have high early termination fees if you want to exit early and high ‘collect out’ charges applied in the event of failure |
7
| Type | Block Discounting |
| What is it? | A cash advance against a future stream of contractual income |
| What can you raise? | The advance will be based on a discounted cash flow calculation |
| How long does it take to put in place? | Each deal will be tailor made so time to set up will vary enormously depending on the complexity of the flows involved, the underlying contracts and the funder’s ability to become comfortable about serviceability issues |
| How long a facility does it provide? | Provides a one off funding advance |
| Pro? | Ability to accelerate cash receipt, turning long term receivables into current cash |
| Con? | Very limited number of playersGiven complexity and due diligence required to set up only applicable to larger income flows |
8
| Type | Stock Finance |
| What is it? | Funding against finished goods stock |
| What can you raise? | Facilities are typically 50% of orderly realisation value which effectively translates into c25% of cost price |
| How long does it take to put in place? | 2 weeks plus |
| How long a facility does it provide? | Typically 12 months plus a notice period |
| Pro? | Provides funding against an asset class which few other lenders will attach any security value to |
| Con? | Only applicable for finished goods stock which is reasonably readily realisableExtensive monitoring requirements means need to have a live stock system and be subject to regular stock auditsCost to set up and monitor means only applicable to larger stock holdings and is potentially costly to useUsually only offered as an add on to an underlying receivables financing facility |
9
| Type | Trade Finance |
| What is it? | Funding for individual trading transactions such as importing goods against a customer order |
| What can you raise? | Varies depending on the funder but can be up to the whole cost of an import including freight and duty |
| How long does it take to put in place? | Depends on the nature of the contract and customers but generally 2 weeks |
| How long a facility does it provide? | The import of the goods through to delivery to the customer |
| Pro? | Funding is on a transaction by transaction basis and so can be a very flexible resource |
| Con? | Can be expensive so there has to be sufficient margin in the transaction to bear the costOften needs to be combined with an invoice finance facility (as the lender’s main security of stock is then converted into a receivable once delivered to the customer)Requires strong customer order paperwork and credit worthy customers |
10
| Type | Redundancy Payments Office loan |
| What is it? | In some circumstances the Government’s Redundancy Payments Office (RPO) will fund the payment of staff redundancy costs by way of a loan to the company |
| What can you raise? | Cost of redundancy payments |
| How long does it take to put in place? | By negotiation with the RPO |
| How long a facility does it provide? | Maximum 3 years repayment term |
| Pro? | Funding specifically to match restructuring costs |
| Con? | RareYou will need support from a professional advisor, typically an insolvency practitioner or turnaround professional to negotiate any facility on your behalf |
11
| Type | Mezzanine Finance |
| What is it? | Essentially a cash flow loanForm of finance used in the large company arena which a limited number of funders also offer to a limited degree in the SME market |
| What can you raise? | Varies depending on funderIn SME market little if any availability below say £500,000, but some availability up to £1m |
| How long does it take to put in place? | Varies considerablyA stressed situation will attract a high degree of due diligence |
| How long a facility does it provide? | One current bank funded scheme offers a 10 year loan at high interest rates part paid as you go, part rolled up into a balloon payment at the end |
| Pro? | Not reliant on underlying security values |
| Con? | Few sourcesHigh due diligence so greater risk of application failureHigher costs than secured debt to cover higher risk level |
12
| Type | Bonds |
| What is it? | Creating bonds suitable for sale by IFAs to retail investors |
| What can you raise? | Only suitable for raising larger sums, typically £250,000 + |
| How long does it take to put in place? | Each bond is tailored to the specific circumstances so can be a lengthy process |
| How long a facility does it provide? | |
| Pro? | An alternative to institutional lending |
| Con? | Relatively high costs to set up as bonds have to be underwritten |
13
| Type | Business angels |
| What is it? | Individual equity investors |
| What can you raise? | Typically sums up to £250,000 |
| How long does it take to put in place? | Using some of the specialist agencies it can be done in as little as 6 weeks; but will often take much longer |
| How long a facility does it provide? | Equity investment |
| Pro? | Can back situations that other funders will not |
| Con? | Very uncertain processTerms (based on views as to business value) can be difficult to agreeSome investors are looking to ‘buy a job’Can be costly to explore the market
The money comes with a principal attached who will need to be dealt with |
14
| Type | Stressed equity institutional investors |
| What is it? | Institutional equity investors seeking stressed and distressed opportunities |
| What can you raise? | Our panel of investors are seeking opportunities with deal sizes of £1m to £30m and many can do much higher sums when needed |
| How long does it take to put in place? | Occasionally deals get done within a few weeks but 2 to 3 months is a more realistic timetable |
| How long a facility does it provide? | Long term capital by way of equity purchasers of the business or a substantial stake in it |
| Pro? | Can back situations that other funders will not including pre-packs and other insolvency buy outsCan be relatively inexpensive to search for funders |
| Con? | Terms (based on views as to business value) can be difficult to agreeFunders will always look to see whether the deal is better done through an insolvency process |
Other Services from Galen Partners Ltd
Galen Partners provides a wide range of practical business support services for owner managed businesses.
Please contact us:
0844 576 0402 or at post@galenpartners.co.uk
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